Several writers link entrepreneurship to asset ownership, trying to incorporate
the theory of entrepreneurship into the theory of the firm. The critical link, we
argue, is capital heterogeneity. Transaction cost, property rights, and resourcebased
approaches to the firm assume that assets, both tangible and intangible,
are heterogeneous; arranging these assets to minimize contractual hazards, to
provide efficient investment incentives, or to exploit competitive advantage is
conceived as the prime task of economic organization. None of these approaches,
however, is based on a systematic theory of capital heterogeneity. In
this paper we outline the approach to capital developed by the Austrian school
of economics and integrate it into an entrepreneurial theory of the firm. We refine
Austrian capital theory by defining capital heterogeneity in terms of subjectively
perceived attributes, that is, the functions, characteristics, and uses of
capital assets. Such attributes are not given, but have to be discovered by means
of entrepreneurial action. Thinking of entrepreneurship as the organization of
heterogeneous capital provides new insights into the emergence, boundaries,
and internal organization of the firm, and it suggests testable implications about
how and where entrepreneurship is manifested.
Keywords: Entrepreneurship, heterogeneous assets, judgment, ownership, firm
boundaries, internal organization.
JEL Codes: B53, D23, L2

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The notion of distributed knowledge is increasingly often invoked in discussions of economic
organization. In particular, the claim that authority is inefficient as a means of coordination in
the context of distributed knowledge has become widespread. However, very little analysis has
been dedicated to the relation between economic organization and distributed knowledge. In this
paper, we concentrate on the role of authority as a coordination mechanism under conditions of
distributed knowledge, and also briefly discuss other issues of economic organization. We clarify
the meanings of authority and distributed knowledge, and criticize the above claim by arguing
that authority may be a superior mechanism of coordination under distributed knowledge. We
also discuss how distributed knowledge influences the boundaries of firms. Our arguments rely
on insights in problem-solving and on ideas from organizational economics.

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Among the many seminal contributions of Ronald Coase, founding property rights
economics is a truly major one. This approach impacted a number if fields in economics
in particularly the 1960s and 1970s, but gradually lost influence. What is called property
rights economics in modern economics, mainly originated by Oliver Hart, is very
different from the original property rights economics of Coase, Demsetz, Alchian,
Cheung, Umbeck, Barzel, etc. in terms of analytical style and explanatory scope. Based
on our earlier work on the subject (Foss and Foss, 2001), we argue that the change from
Mark I to Mark II property rights economics led to Kuhnian loss of content. This is
related to the strong assumptions concerning the definition and enforcement of ownership
rights made in the latter approach which leads to many real life institutions and
governance arrangements being excluded from consideration.

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This paper responds to Kim and Mahoney’s "How Property Rights Economics Furthers the Resource-Based View: Resources, Transaction Costs and Entrepreneurial Discovery" (a comment on Foss and Foss, 2005). While we agree with many of their arguments, we argue that they fail to recognize how exactly transaction costs and property rights shape the process of entrepreneurial discovery. We provide a sketch of the mechanisms that link entrepreneurship, property rights, and transaction costs in a resource-based setting, contributing further to the attempt to take the RBV in a more dynamic direction.

Credible delegation of discretion obtains when it is a rational strategy for managers not to overrule employee decisions that are based on delegated decision rights or renege on the level of delegated discretion (and this is common knowledge). Making delegation of discretion credible becomes a crucial issue when organizations want to sustain the advantages that may flow from delegation: Such advantages are dependent on motivated employees, and managerial overruling or reneging is harmful to motivation. However, little work has been done on how organizations can make delegation credible. We argue that key elements of organizations (i.e., organizational structure, coordination mechanisms, reward structures, and interdependencies between activities) and how these fit influence the credibility of delegation. Fit configurations of organizational elements reduce the probability of managerial intervention that may harm employee motivation. This introduces a neglected incentive dimension to the organizational design literature. Moreover, it is argued that harmful intervention may be reduced by increasing managers’ costs of intervening. Refutable propositions are derived.

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In his seminal 1945 essay Hayek argued that the dispersed nature of much commercially relevant knowledge places strong constraints on the feasibility of centralized allocation and coordination mechanisms, but that there remains a problem of making efficient use of such knowledge (the first Hayekian knowledge problem). He realized that firms, because they make use of authority, are also challenged by dispersed knowledge, and his emphasis on delegation as a response to dispersed knowledge may lead to the prediction that (large) firms shouldn’t exist. Yet (large) firms obviously do exist (the second Hayekian knowledge problem). Recently, many management and organizational scholars have echoed Hayek’s argument that centralized coordination mechanisms, such as authority, may fail in the presence of dispersed knowledge. We examine these modern arguments and argue that they rest on shaky foundations: dispersed knowledge is a less strong constraint on authority than is often thought. We examine the wider implications of this for knowledge-based arguments in management and organizational theory, and call for more research into the micro-foundations of such arguments.

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We examine the argument, put forward by modern management writers and,
in a somewhat different guise by Austrian economists, that authority is not a
viable mechanism of coordination in the presence of "distributed knowledge"
(which corresponds to Hayek’s treatment of the use of dispersed knowledge
in society). We define authority and distributed knowledge and argue that
authority is compatible with distributed knowledge. Moreover, it is not clear
on theoretical grounds how distributed knowledge impacts on economic
organization. An implication is that the Austrian argument that designed
orders are strongly constrained by the Hayekian knowledge problem (Hayek,
Kirzner, Sautet) is shaky. The positive flipside of this argument is that
Austrians confront an exciting research agenda in theorizing how distributed
knowledge impacts economic organization.

A critical knowledge governance problem concerns the consequences for the use of the authority if the knowledge that is essential in a work setting is partially unknown to the person who is to exercise authority. Is it possible to rationally direct work and activities and efficiently utilize knowledge under such conditions? Recently, many scholars have given negative answers to this question, arguing that authority relations are becoming strained by the increasingly distributed nature of knowledge in and between firms. We analyze this argument on the basis of definitions of "authority” and "distributed knowledge.” This allows us to show that --- while intuitively appealing --- the argument that authority cannot be an efficient coordination mechanism in the presence of distributed knowledge is at best problematic. The argument is based on the flawed inference that because the holder of authority is ignorant about some of the knowledge held by employees, he cannot rationally direct them. However, it is correct that the quality of centralized direction (planning, authority) may be compromised by distributed knowledge, leading to choices of other governance mechanisms and structures.

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We discuss the relations between alternative conceptualizations of the market process -
neoclassical, Austrian and radical subjectivist/evolutionary - and alternative approaches to
economic organization, for example, nexus of contract theory, Williamsonian transaction cost
economics and the dynamic transaction cost approach of Langlois and Robertson. We argue
that there is a distinct need for more firmly grounding theories of economic organization in
theories of the market process, and that key ideas of the more dynamic conceptualizations of
the market are likely to substantially enrichen the theory of economic organization.

The MNC literature treats the (parent) HQ as entirely benevolent with respect to their
perceived and actual intentions when they intervene at lower levels of the MNC.
However, HQ may intervene in subsidiaries in ways that demotivate subsidiary
employees and managers (and therefore harm value-creation). This may happen even if
such intervention is benevolent in its intentions. We argue that the movement away
from more traditional hierarchical forms of the MNC and towards network MNCs
placed in more dynamic environments gives rise to more occasions for potentially
harmful intervention by HQ. Network MNCs should therefore be particularly careful to
anticipate and take precautions against “intervention hazards.” Following earlier
research, we point to the role of normative integration and procedural justice, but argue
that they also serve to control harmful HQ intervention (and not just subsidiary
opportunism).